Crowdfunding platforms given option to 'bundle' all funds from loans together

The Financial Conduct Authority (FCA) said it intends to change its rules to allow the platforms to store money being lent between businesses as well as those being lent in a 'peer-to-peer' (P2P) context in the same place, so long as it is kept separate from the platforms' own funds. As an intermediary in a loan agreement, the platforms act as a depository for funds being loaned.

The FCA said (27-page / 309KB PDF) it had proposed the changes after some platforms raised concerns about the "burden" placed on them by existing rules.

Currently, the rules require that platforms keep funds being loaned through peer-to-peer agreements separate from their own funds as well as the funds being exchanged in the course of business-to-business (B2B) loan agreements that fall outside the regulatory framework. The P2P loans are regulated by the FCA whereas certain unregulated B2B loans fall outside the regime.

"Currently, an investor’s money held by a firm in relation to P2P agreements (money to be lent or received in repayments) would fall within the definition of client money for the purposes of the client money rules in [the Client Assets Sourcebook, set of rules 7 (CASS 7)]; it must be segregated from the firm’s own money and other money (including in relation to unregulated B2B agreements)," the FCA said. "We understand that some firms consider this burdensome as firms in the P2P industry have generally not developed systems that distinguish between money held for the purposes of P2P agreements and that held for B2B agreements."

"We propose to allow firms that hold money in relation to both P2P and B2B agreements, to be able to elect to hold all lenders’ monies under CASS 7 if they wish to do so. Firms may then segregate P2P and B2B monies from the firms’ money, together, without breaching the CASS rules and without necessarily needing to distinguish between P2P and B2B agreement monies. However, if a firm does make the election to hold all P2P and B2B monies under CASS 7, then all lender monies in relation to B2B agreements would need to be held as client money under CASS 7, and the firm would not be able to rely on the professional client opt out," it said.

The client money rules exist to provide a layer of protection to investors by placing a general requirement on companies subject to the rules to hold their money separately from company funds. This segregation means that, where a company holding investors' money suffers an insolvency event, it is easier for investors to recover their funds.

If a 'professional client' of a business that stores money on its behalf agrees, then the company holding the funds can generally elect to opt-out from the client money rules.

A raft of rules are set out in CASS 7 which dictate to companies subject to the rules how they must treat client money, as well as what "organisational arrangements" they need to put in place to safeguard their clients' rights. Record keeping duties are also imposed on companies that are subject to the client money rules, among other rules.

A report by the FT Adviser last week outlined the increasing calls for a tightening of regulation in respect of investment-based crowdfunding. At the moment investment-based crowdfunding and loan-based crowdfunding in the UK are subject to different regulatory regimes overseen by the FCA.

Financial services technology expert Yvonne Dunn of Pinsent Masons, the law firm behind Out-Law.com, said that, in terms of loan-based crowdfunding, any future reforms to regulation should "recognise existing consumer protections that exist in the way platforms operate".

"P2P technology and networks have their own elements of regulation which already offers a degree of protection to 'the crowd' – through transparency and verification processes for example," Dunn said. "If regulators were to look at reforms in the market then this is something they should consider when assessing whether the full scope of regulation applied to traditional lending models needs necessarily to be applied to innovative business models, such as those embodied by crowdfunding platforms."

"At the same time, regulators face a challenge in ensuring that there is a regulatory level playing field. It is to be hoped, however, that there would be an acknowledgement of the difference between old and new business models within the regulatory regime. The FCA, through a range of initiatives, has already demonstrated its flexible and supportive approach to innovation in its approach to regulation," she said.